Difference Between Shares and Debentures

Shares and debentures are two primary instruments used to invest in companies. These financial instruments form the backbone of the financial markets and are different ways of raising capital. Shares represent partial ownership in companies, which investors can purchase on stock exchanges. However, it represents loans to firms making owners the creditors to companies. Thus understanding the core difference between shares and debentures is important for investors. Shares represent owning part of a company, while debentures mean lending funds to a company. In this article, we will cover the key difference between shares and debentures, their types, benefits and more. 

Shares vs Debentures

Knowing the difference between shares and debentures is important to understand which investment better suits your financial goals. Below are some of the differences between shares and debentures. 

Types of Shares and Debentures

There are various types of shares and debentures. Most of them as listed below. 

Types of Shares

There are two types of shares namely equity and preference shares.  

• Equity Shares: By investing in equity shares, the investors gain voting rights as they become partial owners of the company. Along with capital gains, investors may get a chance to avail returns in the form of dividends. However, the amount of dividend is based on the company’s profitability.  
• Preference Shares: In this type of share, the investors get limited or no voting rights but are offered fixed dividends. The dividends are paid to preference shareholders before paying dividends to equity shareholders. In case of liquidations, preference shareholders are given priority over equity shareholders.  

Types of Debentures

There are four types of debentures namely convertible, non-convertible, secured and unsecured debentures. 

• Convertible Debentures: These types of shares come with a choice to be converted into shares. This means that investors can choose to convert their debentures into shares. This provides the investors with an option to convert their debt to partial ownership, especially if the company is performing well. 
• Non-Convertible Debentures: Unlike convertible debentures, this type of shares cannot be converted into shares and thus they remain a fixed-income debt instrument. This type of debenture is mostly preferred by investors with conservative mindsets who seek regular interest payments.
• Secured Debentures: This type of debenture is considered to have lower risk since the debentures are backed by company assets as collateral thus providing more security to investors. In case the company defaults, the investors can claim these assets for their investors. 
• Unsecured Debentures: Unlike secured debentures, this type of debenture is not backed by company assets and thus is considered to be riskier than secured debentures. In case the company defaults, investors have limited protection and have to rely solely on the company’s creditworthiness. 

Benefits of Shares and Debentures

Like every other investment, investing in shares and debentures is beneficial. Let us look into some of their benefits. 

Benefits of Shares

Investing directly in shares comes with its fair share of risks. But the returns are equally rewarding. Some of the benefits of investing in shares are listed below. 

• Returns associated with investing in shares are higher and can be acquired in the form of dividends and capital appreciation. 
• Investors get the chance to participate in the company’s decision-making process with voting rights. 
• Investors can easily liquidate their holdings by selling their shares in the stock market.

Benefits of Debentures

Investing in debentures is a good way to diversify and mitigate risk in your portfolio. Other benefits of investing in debentures are listed below.  

• By investing in debentures, investors are guaranteed fixed income in the form of periodic interest payments. 
• During liquidations, debentures are prioritised over shareholders. 
• Unlike in shares, the returns in debentures are predictable since they are provided in the form of consistent interest payments.

Conclusion
Before choosing your investment vehicle, it is crucial to understand what is the difference between shares and debentures. Shares are more suited for investors who have a greater risk appetite and are looking for growth and ownership. Debentures can suit investors who seek steady but regular returns. In the case of liquidity, debenture holders are preferred over shareholders. This increases the risk factor of investing in shares as compared to debentures. Once you understand the share and debentures difference, start trading with reliable online investing apps.